Beyond casino capitalism

Only a new social partnership can stop an orgy of speculation

The figures are unimaginable. Untold billions are being wielded by unscrupulous speculators to make massive gains in stock markets and off the backs of commodities, like food and oil. I used to call it casino capitalism until I realized that gambling is better regulated than this orgy of speculation. If we don’t do something to stop the rot, capitalism itself will be under threat. All of us — trade unions, governments, employers with consciences and leaders from across the political spectrum — need to get together to turn things around. And that is quite something for a former class warrior to say.

I was brought up in an atmosphere that regarded collective bargaining as a compromise between socialist trade unions and capitalist employers. Agreements were a truce in the class war, not some kind of warm, constructive relationship. Anyone who talked of partnership risked being called a class collaborator. In practice, between consenting adults, the relationships were often close and trusting. But the rhetoric was frequently harsh and confrontational.

I was never happy with this view. I grew up in the shadow of a giant chemical plant and appreciated the paternalistic but progressive attitude of the company as well as the largely co-operative spirit of the unions. There was the provision of shares for workers, financial encouragement for their children to go to university, support for occupational health and many other benefits. I also admired the remarkable post-war success of West Germany and the enduring success of Sweden, based on collective bargaining and “social” partnership. I came to see the superiority of Continental social democracy over the polarized “them and us” attitudes that damaged many industries and companies in the UK.

And so, during my decade as general secretary of the Trades Union Congress in Britain, I made a big point of promoting the virtues of European-style partnerships at work. I said that negotiating with successful companies was much more productive than having to deal with unsuccessful ones. I also told my fellow trade unionists that class warfare was outdated as societal changes had resulted in a huge growth of the middle classes, and that the UK needed much better relationships at work if it was to keep up with its neighbors.

But international developments in modern capitalism are having a very harmful effect on those of us who still believe partnership is the best way forward. The whole thrust of modern capitalism over the past 25 years has been to align companies with the interests of shareholders. These shareholders are often looking for a quick return. As one major investor told me: “A long-term deal is a short-term one gone wrong.”

So the accountability of companies to shareholders has been tightened greatly, with senior executives often paid in shares and share options, according to the returns to shareholders. This has had a huge effect on the psychology and motivation of managers in large corporations. Before, they had various objectives. Of course, they wanted the company to do well, but they also respected its position in the community and relished a lively relationship with trade unions and government. In some cases, managers also recognized their duty of care to employees.

Managers’ pay was not dictated solely by shareholder value, but was based on a range of criteria including growing market share. In sum, they were accountable to a range of stakeholders in the business, not just to the shareholders.

This is no longer the case in the English-speaking world. Shareholder value is the first, second and final objective of management. Otherwise, the company swiftly loses its status as a desirable location for investment.

I remember what happened at Unilever a few years ago after some disappointing company results. The firm was interested in other stakeholders, not just shareholders — or, at least, not just their short-term demands. After the poor results were released, the financial institutions moved in, ending Unilever’s unique Anglo-Dutch protections against takeover and personnel changes. Shell has been through a similar trauma, as have other distinguished companies. Examples like these delight the investment world; they show who really is in charge.

The investment world is, of course, not just a club of the super-rich. It is also a club of those managing pension funds and life insurance money for many ordinary people. They demand high returns, seeking out investments with annual yields of 20 percent or more, even when inflation is just 2 percent to 3 percent a year. Private equity firms often claim to be able to make such massive returns. The private equity partnership KKR says it has made 27 percent every year since 1987. Certain other investment vehicles, including hedge funds, claim similarly spectacular returns.

Private equity and hedge funds are the provisional wing of the financial services world, but not the only sharks in this sea. A complex range of investment vehicles cruise for hapless corporate victims. They use tax breaks, high leverage and ruthless disposals to get returns. Speculation through derivative instruments and other financial products ratchets up prices. It is a speculator’s economy where long-term mutual commitments are overwhelmed by the market’s demand for quick financial gains. It’s not only a problem for stock markets and the financial derivatives sector. As property market yields slow, speculators have switched attention to commodities — including oil and some foodstuffs.

It is surprising that a couple of years ago few people could have explained how a hedge fund worked, what a derivative was or how private equity “strips and flips.” Such ignorance seems to have extended into the senior ranks of some of the world’s major banks, given that we now know they were clueless about the risks of the sub-prime mortgage market in the United States.

Also, until a few years ago, the reputation of business had generally been good. For many years it has been the dominant political view in Europe that business should be freed from red tape and regulation. It was axiomatic that corporate taxes should be cut and that income inequality was inevitable, because any attempt to curb salaries of talented managers would simply mean they would migrate to countries with the highest pay and lowest tax. These notions were not limited to the right-wing of the political spectrum.

Now, at least, there are signs of change. The image of financiers suffers from the sub-prime crisis, along with revelations of leading banks speculating in bonds based on risky mortgages. German president Horst Koehler recently described global financial markets as a “monster.” Germany’s Chancellor Angela Merkel supports creating a European credit ratings agency to rival those in the United States and wants stronger rules requiring banks to maintain a higher ratio of capital reserves.

The combination of excessive greed and reckless speculation has damaged the reputation of corporate business too. Luxembourg’s Premier Jean-Claude Juncker, chairman of the 15-nation group of eurozone finance ministers, recently called excessive executive pay a “scourge.” France’s President Nicolas Sarkozy has criticized “rogue directors,” and opinion polls across Europe show a majority want to see tax increases for the wealthy. Some European governments are already taking steps to curb boardroom excesses; in Germany, the Social Democrats are pressing for laws to restrict excessive corporate pay and the Christian Democrats are moving against share options. In the Netherlands, the debate has gone further, with draft legislation in parliament that would tax generous severance payments.

The ripple effect of this change in public and political attitudes is spreading, with the business lobby in Europe already showing signs of weakness. Big businesses do not like the Temporary Agency Workers Agreement. Nor do they like renewed powers for European Works Councils. But the European Council and the Commission proceed with both despite employers’ concerns.
The spotlight also shines on the murkier financial practices of big investors. The more people understand about the methods of bodies like hedge funds, the more shocking the system seems.

Their methods challenge the very definition of a company and the proper obligations of ownership. For example, one multi-billion dollar business has emerged in share loans. For a fee, a hedge fund will arrange to borrow shares from an insurance company or pension fund which it then proceeds to sell. Economics commentator Will Hutton explains that: “What then happens, it is the opposite of a bubble, a kind of financial black hole. The hedge funds sell the shares simultaneously, and the downward movement becomes self-reinforcing, with companies raising money during a rights issue particularly vulnerable.” Share-loans of this kind are believed to exceed a stunning $10 trillion.

Companies trying to raise money are not the only target. The Dataexplorers.com Web site gives some idea of the extent of the nightmare. For example, 10 percent of the shares in British house builders Barratts have been borrowed to be sold. Its chief executive, Mark Clare, has said that he thought his company was the victim of a seller’s conspiracy after the companies shares collapsed amid massive trading. Where is there any room for social partnership in this kind of financial frenzy?

The worst excesses of this type are in the Anglo-American world, but make no mistake, continental Europe is also heavily affected. Hedge funds are busy in all of Europe’s bourses and private equity is out there too. Fortunately, U.S. investor and philanthropist Warren Buffet is also looking for acquisitions in Europe; let us hope he can out-compete the sharks.
Capitalism’s worst enemies are today within its own ranks. These financial operators care nothing about climate change, new life-saving technologies or indeed anything of practical use.

Their philosophy barely progresses beyond Abba’s refrain: “Money, money, money. It’s a rich man’s world.” They must be stopped by the social democrats, by the Christian democrats, by the trade unions, by European solidarity and by joint action with the United States and others. Otherwise, these financial monsters will destroy us and themselves in an orgy of speculation. “Saving Capitalism From Itself.” It is not a slogan you usually see on the banners of trade unions, but it has never been more necessary than today.

John Monks is general secretary of the European Trade Union Confederation (ETUC). This article is adapted from a version appearing in the autumn issue of Europe’s World, a Brussels-based policy journal.